Profit By Betting Against the Crowd
Investor-sentiment measures can tip you to rallies and corrections. Here are the ones to watch and how to exploit them.
Is there wisdom in crowds? Many professional money managers think so, although usually the wisdom comes from doing exactly the opposite of what the crowd does. And as a smart investor yourself, you may want to learn about and start following some of these “sentiment” indicators.
This isn’t voodoo. Often, sentiment indicators are remarkably accurate. For example, negative sentiment, as measured by surveys from the American Association of Individual Investors, hit the highest level ever recorded on March 5, 2009. On that day, seven out of ten investors classified themselves as bears. Only four days later, Standard & Poor’s 500-stock index bottomed after declining 55% in 18 months and embarked on a recovery that has lifted the benchmark 71.6% through August 4.
Currently, the weekly AAII surveys are giving mixed signals. The August 5 survey found that 38% of investors were bearish, meaning they expect stocks to decline over the next six months. The July 8 AAII survey was the most pessimistic in recent weeks, with 57% taking a bearish stance.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
David Chalupnik, head of equities at First American funds, has been studying sentiment data closely and also sees it as mixed now. After the May 6 “flash crash” and the increased market volatility through June and July, Chalupnik thinks individual investors won’t turn bullish on stocks for a while. “I expect them to be optimistic about stocks once a rally is well under way and job growth returns,” he says.
The AAII survey hasn’t cornered the market on measuring investor sentiment. Investors Intelligence, a New Rochelle, N.Y., research firm, surveys more than 100 investing newsletters each week to divine their feelings. The July 14 survey found that bears outnumbered bulls for the first time since April 2009. By July 21, bears and bulls were found in roughly equal numbers. Investors Intelligence charges $199 per year for its survey data.
Follow the Smart Money
Surveys, however, are just opinions. Many experts say that a truer measure of sentiment is where investors are putting their money. That’s why Liz Ann Sonders, Schwab’s chief investment strategist and one of our favorite market gurus, likes SentimenTrader.com’s Smart Money/Dumb Money Confidence index.
The index tracks the movement of money using a basket of indicators, such as option positions held by traders (the smart money) and flows into and out of Rydex funds, which let ordinary investors make leveraged bets on the direction of the stock market and individual sectors (the, um, not-so-smart money). The index “allows you to see what the ‘good’ market timers are doing with their money compared to the ‘bad’ market timers,” Sonders says.
By mid May, smart-money investors turned bullish while the dumb money retrenched, according to SentimenTrader. At the end of June, a similar spike in smart-money bulls offset dumb-money bears. But now both sides are neutral. A SentimenTrader subscription, which costs $25 per month or $250 per year, gives you access to the Smart Money/Dumb Money Confidence index in addition to a boatload of other sentiment data.
Look for Extremes
When investor sentiment is significantly negative, as it was in March 2009, the time is ripe to move in the other direction. Chalupnik plans to add cyclical, low-quality stocks to the funds he manages when bearish sentiment is high and reduce positions when optimism reigns. That sounds like a hard strategy to execute. Here’s an easier way to take advantage of the market’s fear and greed: Rebalance your portfolio toward stocks when investors give up hope and do the opposite when they turn super bullish.
-
Use An iPhone? You May Be Hearing From A Class-Action Lawsuit Group
A handful of suits against the iPhone maker seek to crack down on everything from app store purchases to messaging.
By Keerthi Vedantam Published
-
Capital One/Discover: What's In Their Wallet For You?
Push back on Capital One's planned merger with Discover is growing with one group of consumer advocates calling for a public hearing.
By Keerthi Vedantam Published
-
Stock Market Today: Dow Outperforms as Merck Hits New High
The S&P 500 and Dow Jones Industrial Average snapped three-day losing streaks as drugmaker Merck rallied.
By Karee Venema Published
-
Stock Market Today: S&P 500, Dow Extend Losing Streaks
Reddit stock continued to charge higher and has now nearly doubled in price since last week's IPO.
By Karee Venema Published
-
Stock Market Today: Bitcoin, Boeing Shine as Stocks Slip
Digital World Acquisition sizzled, too, ahead of its merger with Trump Media & Technology Group.
By Karee Venema Published
-
Stock Market Today: Dow Retreats After Nike Earnings
The Nasdaq Composite managed to notch a new record close Friday, building on the week's impressive gains.
By Karee Venema Published
-
Stock Market Today: Stocks Hit New Highs as Rate-Cut Momentum Continues
Reddit sizzled in its market debut, while Apple slumped after the tech giant was slapped with an antitrust lawsuit.
By Karee Venema Published
-
Stock Market Today: Stocks Climb After Fed Forecasts Three Rate Cuts This Year
The main indexes notched new record closes Wednesday after the Federal Reserve kept its outlook for rate cuts unchanged.
By Karee Venema Published
-
Stock Market Today: Stocks Close Higher After Nvidia's Reversal
The main indexes erased early losses Tuesday as mega-cap tech stock Nvidia swung higher.
By Karee Venema Published
-
Stock Market Today: Nasdaq Soars on Strength in Magnificent 7 Stocks
The main indexes started the week strong after several mega-cap stocks rallied.
By Karee Venema Published